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Why the Past Year Should Make You Rethink Your Portfolio

Published on May 29, 2023

John Hagensen

Market volatility often prompts investors to rethink their strategy, but what are the critical elements you should focus on when it comes to assessing your portfolio’s performance (10:00)? Plus, get answers to questions about the debt ceiling and find out whether you should be bracing for impact as we approach the deadline (39:20). Find out more on this week’s episode of Rethink Your Money.

Episode Notes:

Presented by Creative Planning, each week Host and Managing Director John Hagensen cuts through the headlines and loud takes to challenge the advice you may have been given and reaffirm what you know to be true. Plus, don’t miss his weekly interviews with Creative Planning specialists as they cover investing, taxes, estate planning and many other areas that impact your financial life!

John: Welcome to the Rethink Your Money podcast presented by Creative Planning. I’m John Hagensen and a head on the show. I’ll dive deep into the world of personal finance and empower you to make more informed decisions. On today’s exciting lineup, I’ll tackle first the powerful emotions of fear and anxiety that often cloud our financial decisions. Next, we’ll explore the impact of higher interest rates on your investment plan, as well as the fascinating world of artificial intelligence and ultimately, the impact it has on your financial strategies. And lastly, the burning question on everyone’s mind, is now in this unstable market, the time to be investing? So get ready to challenge the status quo and join me as I help you rethink your money.

Fear is a powerful emotion, and fear can play a critical role when it comes to our financial lives. You won’t eliminate fear. You’re a human. Especially when it comes to your life savings. But first, being aware of it and then understanding the tools to combat it will be critical in your long-term financial success. Now, if you feel fear, rest assured you’re not alone. According to recent surveys and studies, approximately 72% of Americans say they feel stressed about their financial situation while a staggering 64% report feeling anxious or fearful about their ability to retire comfortably. The number one value most investors find in a great financial advisor could be summarized in three words, peace of mind. But here’s my encouragement for you, fear subsides when knowledge and education increase, and this applies to other aspects of our lives as well. Let me share a personal story with you.

Prior to being a financial advisor, I was an airline pilot and prior to being an airline pilot, I was a flight instructor. And of course, prior to being a flight instructor, I was a student pilot learning how to fly. And when I was a student pilot, the first time my instructor had us practice stalls, it scared the living daylights out of me. Would I feel the wings buffering and we’re just going to have the nose drop out of the sky? This is terrifying. The thought of losing control in the air was enough to make my palms sweat. My heart was racing, but as I gained experience and eventually became a flight instructor, those same maneuvers, they just became another part of the job. Why? Well, because knowledge and experience had replaced my fear with confidence. For many of you, managing your money is like stepping into the cockpit for the very first time.

If you’re confronted as a 64 and a half year old with 30 pieces of advertisement in your mailbox around Medicare and you’re trying to sort through all the nuances of different policies, different companies, should I do an advantage plan? Does a supplement make sense? What prescriptions are included in this drug coverage? Does it matter that I have preexisting conditions? And that’s just one example. How about when do I take social security? Do I have enough to retire? If I were to retire, how do I structure my investments? Which accounts should I withdraw from first? Which accounts should hold stocks, which should hold bonds? What are the tax implications of those withdrawals? How do I protect my assets? What type of estate plan should I have? And the list of course, goes on and on. But here’s the truth. You don’t need to navigate this alone, and that’s important to recognize because often, the reason you’re feeling scared is because you’re seeing things for the very first time, and that’s not just a shameless plug for Creative Planning.

I’m encouraging you if it’s not Creative Planning, find an advisor who can help you, who has helped thousands of people already retire. They’ve already helped them make that Medicare decision and it will help guide you through those turbulence. Keep in mind the media is really good at playing on your fear. Here’s an interesting tidbit that may challenge your perception a little bit of fear. And by the way, I’m going to post this chart to the radio page of our website at creativeplanning.com/radio. So CNBC will run a segment called Markets in Turmoil. It’s the special segment. The chart shows maybe, I don’t know 100 times in the last 10 or 15 years that they’ve run this segment. The average one-year return following the market’s in turmoil, terrible, crazy, segment is up 40%. It’s almost like they’re telling you in a roundabout way, everything’s going to be fine.

But you know what? That would be really boring and nobody’d listen. So it’s way more interesting to tell you, “Be terrified markets are in turmoil.” Don’t let sensationalized headlines and market fluctuations dictate your choices. You’ve got to focus on the long game when it comes to your long-term investments like stocks, you might say, “I’m 70. How do I focus on a long game?” Because some of your portfolios still going to need to be there when you’re 75, 80 and 85, so you are still a long-term investor. The other thing though that fear will do is that it can lead us to make impulsive decisions, especially when it comes to investing. You see a stock market dip, panic starts setting in. A lot of people want to sell everything. Let’s run for the hills. I’ve got a cautionary tale that made my blood boil. According to a report by Market Watch, regulators uncovered a scandalous scheme where this unscrupulous firm lured unsuspecting seniors into a gold coin scam.

Here’s why it’s relevant for our conversation today. You know how they did it? By tapping into the fear and anxiety of these individuals, they convinced them that, hey, your wealth is under imminent threat and these gold coins, they are the salvation. If our currency goes to zero or loses our reserve status, you’re in trouble. The brokerage firm allegedly deceived these seniors by charging exorbitant markups, which obviously left them with significantly less value than they had invested. The fees were ranging from, and don’t miss this 100 to 300%. Those were the fees for purchasing them, which obviously, far exceed any of the industry’s standard fees. This firm’s ability to manipulate these seniors using fear, right? That’s the key. That fear is what led ultimately to these devastating financial losses for unsuspecting individuals who were really just acting upon a God-given normal human emotion to protect oneself.

Well, here’s another example. Recently, a prospective client who was wanting a second opinion came in and I reviewed their situation. They had about 600,000 in their 401k, 300,000 in brokerage accounts, and over $1 million in long-term high commission illiquid, terrible performing. Did I mention super high cost annuities? These things weren’t even keeping up with inflation, not even close, but let me provide you the basics of how this happened. Maybe it’s not as obviously egregious as the gold coin scam, but it’s close to as destructive and it’s far more widespread. The insurance salesperson says, “Markets are volatile, times are uncertain. You can’t afford to leave your retirement to chance, so let’s buy this annuity or this permanent life insurance.” I’ll get paid a big fat commission. Of course they don’t say that, but they’re playing on your fear of the uncertainty to basically exchange that risk with a guaranteed risk of barely growing your assets and having limited access to them.

But this person’s fear would have subsided, and by the way, it had, which is why they were seeking out our advice because they had buyer’s remorse. “I really don’t think I should have done this, but I was concerned during the pandemic and I was nervous and I didn’t know what was going to happen and I sold at the bottom as it so often happens or close to the bottom and put the money into this ‘safer investment’.” Now, maybe this person would’ve had less fear if they had been educated more on the facts by an advisor, by an advocate, a fiduciary rather than a salesperson. Things like almost 75% of calendar years, the market’s up. 90% of the time historically, over a five-year period, the market’s up. 98% of the time, over 10 year periods, the broad markets are up in value. The average return of the S&P 500, the last 40 years is just under 10%. The average return, the last 100 years is about 10%.

Of course, past performance is no guarantee of future results, but that’s going through all sorts of different market and political and economic environments and the resilience of the stock market has persisted. My tip for you in combating those fearful moments is to acknowledge that really, anytime you’re feeling fear and the solution is something that’s going to lock up your money for a long period of time, if you change your mind, you can’t get out of it without large penalties, run for the hills. Just run. Like Joseph running out of Potiphar’s house, leaving his robe in her hands. It’s like, I got to get out of here. You need to run just like that out of that insurance agent’s office. They’re not advisors, they’re salespeople. Let’s look at the last couple of scenarios with market volatility.

According to the Investment Company institute, during the turmoil in the great financial crisis during 2008, investors pulled, and this is jaw dropping, $233 billion out of stock market funds. Think about that. The bottom was March of ’09. Where’d they park all of those proceeds? Well, good old-fashioned cash and bonds. On the surface you’re saying, “Well, that’s a prudent move. Everything was collapsing.” Well, no, because the subsequent year saw a rapid market recovery. Stocks skyrocketed, leaving those that were fearful and had sold out, bailing out on the market precisely at the wrong time really disappointed. Fast-forward to COVID. In the face of uncertainty, investors once again, let fear call the shots. According to Morningstar data, this time, a staggering 326 billion was yanked out of US stock funds in the first quarter of 2020. Again, the market bottom was in March of 2020, and of course, you guessed it, cash bonds and other seemingly safe investments were the recipients of these proceeds coming out of the market.

And what happened? The market rebounded like a champion fighter up 70% over the next 12 months. So if I can encourage you on one thing, when fear takes hold, don’t let rationality go out the window, don’t sell off and dive headfirst into safe havens because the harsh reality, and I’ve seen it so often as a wealth manager selling low, then you miss out on the eventual rebound. You’re chasing your tail instead of being patient and level-headed. If you have questions and you’re not sure where to turn, we have been helping families overcome their fear by empowering them and educating them and building and maintaining and adjusting real financial plans. We’re a law firm with over 70 attorneys, a tax practice with over 100 CPAs and a wealth management firm with over 300 certified financial planners. We’re helping families in all 50 states and 75 countries around the world.

We’ve been doing this since 1983. We aren’t a brokerage firm. We’re not selling proprietary products. We’re not receiving third party kickbacks as it’s been done, and by the way, destructively, in my opinion, for decades. We are fiduciaries acting in our client’s best interests as we manage or advise on a combined $210 billion of assets. Lean on our experience because we’re not fearful. We’ve seen all of these things before and we’ve helped tens of thousands of people just like you overcome their fear and gain confidence around their life savings. I want that for you as well. Just speak with a local advisor here at Creative Planning. Visit creativeplanning.com/radio today for your complimentary visit.

My special guest today is Creative Planning wealth manager Sean Granere. Sean is a fantastic advisor, works with an array of clients including professional athletes, he and his wife and their three children reside in Houston, Texas. Sean Granere, thank you so much for joining me here on Rethink Your Money.

Sean: Absolutely. Thanks John for having me.

John: I’m looking forward to this conversation. Where when people are feeling confused, do you suggest every person should start when it comes to their money?

Sean: Man, where to start? And the problem is, I want to actually start with, John, where maybe not to start.

John: Good.

Sean: Man, we’re in this world where right now we turn on the media and everything’s so negative. We read magazines and all the talking heads on the news channel, and boy, if you listen to the Fed and what they’re doing, if you listen to the debt ceiling and by the time you listen for 10 minutes, you almost need to go to a counseling session.

John: The sky’s falling, right?

Sean: Oh, it’s a little bit out of control and I think what happens, it creates this fear or panic, and then ultimately, John, we do the very worst thing to do and we do absolutely nothing in more of a state of I don’t know where to go. Everything sounds so bad. I like to take a step back and let’s say, “Hey, let’s just talk about where we are today and where we want to go.” The only true opportunity to understand how to get started is to really define where we are today. And today is, we’re talking about financial planning, we’re talking about getting started, we’re talking about putting ourself on the right track. It really begins with a true understanding of where am I today, and ultimately, what am I going to try and get to?

So John, you’ll hear me talk a lot about a plan because my growing up days, I played baseball and it was college, and how do you want to get to the next level? And you don’t just get a bat and hope that you can hit a ball out of the park. You got to take a step back, you got to break it down, and you got to build a game plan to have success.

John: I think oftentimes, that starts with having a budget, because if you don’t know where money is going or you don’t have positive cash flow, even the best financial plan is rendered useless if you’ve got nothing but debt at the end of the month. Do you have any tips for how you help clients create a budget or think about this?

Sean: Most important thing is you’ve got to be the master of your money. As we receive money through a paycheck or any form of income, we’ve got to understand then where our money’s going to. So the very first thing that I sit down and I’ve got some NFL clients that I’m working with, and they’re young and they’re making a ton of money, but the problem is, we don’t have any understanding or direction of where the assets are actually going out to. And if you have no clue, boy, it’s impossible to truly be a master of your money. Back in my day, and man, I feel like I’m old now, but back in my day we had a checkbook and you could open up your checkbook and you could see where everything’s going and you could track your money, and today, you’ve got a card and next thing you know, a week’s gone and you’ve spent $3,000 on meals or dining or drinking, and ultimately, you miss an opportunity to save.

So we spend a lot of time and say, “Hey, let’s actually create a budget.” The first thing that we actually do is we’ll even share some different things. There’s an app that I put on all my athlete’s phone. It’s called Mint, M-I-N-T, and it really helps you start to direct everywhere that your assets are going. And there’s a rule of thumb, hey, 50% of your income, really the idea, that should cover our immediate needs. You’ve got 30% for your wants. Those are things that I would love to have if I have enough. But 20%, then I’ve got to back in and start my saving plan because ultimately, young singles today in this environment, if you think in the future, social security is a question mark. Companies don’t offer pensions, everything that you’re going to have in retirement is really going to be dictated on you and what you start to do today.

John: Well, and you had mentioned young singles, and I’m sure a lot of these NFL players or other athletes that you work with, a lot of them are younger, have a lot of money, but I think this applies to anyone not married. I hear sometimes, well, I’m single. This is just my money and my plan. It’s not affecting kids, it’s not affecting maybe a spouse. What would you say to the person who says, “I don’t think I need a financial plan because I’m not married yet?”

Sean: Oh. I would say for the power of your money, the more you save from age 25 to 40, what you save in that timeframe is more critical, more important than what you actually save from 40 until your retirement years. And it’s such an important fact for us to understand the power of compounding wealth and having the opportunity to start saving. And again, at some point, my hope is that you find somebody you want to spend time with, potentially have kids, potentially have a family, and if you start today, when you go to buy that house, when you go to set yourself up for success as you have a family and start college savings, dive into retirement planning, you’re going to have yourself set up for success rather than always trying to live paycheck to paycheck.

John: Well, and Sean, you and I both know that simple things aren’t always easy to accomplish. So the idea of having a budget and tracking things in mint.com and having a financial plan, it’s like, oh, this sounds fantastic while we’re listening to it, but much like eating healthy and losing weight, I’m pretty sure I know how to do this intellectually. I need to eat less and I need to move more, right? But it’s not that easy to do. So what would you say are some tips for how you can stay on track with your plan? Because it’s a lot like a gym membership. It’s packed in January and sometimes by middle of February, shoot, middle of January, it’s already died off a little bit. How can we stay on track with these plans?

Sean: John, you’re exactly right. Shoot, I even think about my New Year’s resolution, right? It feels like January 6th you’re already done and then you give up and you wait again till the next year.

John: Oh, man. Yeah, really, that happens to you? That never happens to me, Sean. I can’t believe you.

Sean: Well, you look too fit. You look fantastic. I can see why. See, I got to learn from you, John. Maybe I should turn the question back, but John, I think the most important thing for anybody, whether you’re 25 coming out of college, whether you’re 45 or 65, about to go into retirement, whatever age, you’ve got to have a plan. And again, at creative planning, we talk about a plan. We actually want to sit down and build a net worth statement. We want to understand again that where you are, the stake in the ground and identify the goals of where we want to go, and then we build a strategy as we’ve got our budget in place. But then when you build a plan, it’s something that you’ve got to go back through and review once a quarter as you’re trying to keep yourself on track.

It’s easy to get derailed in this world. There is so much media chasing your dollar to go buy that new car or the new gadget or whatever it is. I feel like Apple’s got a new phone every 30 days that we need to go purchase, and ultimately, we’re missing the opportunity to stay on plan. The other thing I’ll say is, hey, failure is not failure unless we actually forget to get back up again. And what I mean by that is, hey, if we set a plan, we’ve got a strategy, and by May we’ve fallen off, we can get back on. It’s never too late to get started. The biggest problem is we never get going again.

John: Absolutely true. A couple of the things that I like to share with clients in terms of trying to stick to it is keep it simple and automate as absolutely much as possible. And I found too, the more that you understand your own financial plan, which is why it’s such a priority here at Creative Planning, we build the plans in front of the client, we discuss that with the client. We could do it on our own, but we want there to be some engagement and understanding because you and I both are much more likely to stick to something that we feel like we’ve been a part of and we understand it at least at a core level, why things are where they are and how it makes sense to benefit us down the road to help us accomplish our goals.

So now let’s transition. I’m younger, I’ve got a budget, I have a plan. I’m saving the 20%. I’ve got a long time horizon, right? Let’s say this is somebody in their mid-20s, maybe 30. How would you recommend they build a portfolio when growth is the number one priority? Volatility is not that big a deal. They don’t need the money for two or three decades.

Sean: Yeah. So we face this every day because man, it seems the younger generation wants to pull up a stock and say, “Man, I want to throw all my money into Apple, or I want to throw all my money into Microsoft.” Facebook was huge. Everybody wants to throw their money in Facebook.

John: How about Peloton and Zoom during the pandemic, right? Those were no-brainers, right?

Sean: Those were no-brainers. If you look at last year, John, it was a prime example. All those no-brainers. We even made initials for these stocks, right? You got to have the FANG stocks. We even named these things. And then ultimately, what happens last year? Well, you see these companies going down 50 and 60 and 70%? And yes, we’re young and we’ve got time, but you want to be smart on how you do this. At Creative Planning is we talked about, you build a plan and as you build a plan, and the more time you have, then the more you can have in equities. But instead of positioning yourself with an individual stock that could go bang or bust, you want to position yourself using indices where you can actually have John, as you said, a systematic approach to saving and then allow your money work the hardest for you, giving you the highest probability of success. If you look at the S&P 500 versus individual securities, you’ve got 500 stocks that are working hard for you versus that one. You’ve given yourself a higher probability of long-term sustainable success.

John: I just saw a study recently that in 2022, 83% of active fund managers lost to their benchmarks. So even professionals making millions of dollars managing, in some cases, billions of dollars, are unable to identify in advance which of the specific stocks are going to outperform. And we know that it’s a very small percentage that account for all the growth. So one way of looking at that is, well, that’s why I want to own just that small percentage, Sean, so I can make all this money. But the fact of the matter is you’re much more likely to miss and not find Apple before it was Apple.

And that’s why as the great John Bogel said, “Why search for the needle in the haystack when you can buy the whole haystack?” So I love that quote. I think it’s great advice. We’re hitting on a potpourri of different topics here, Sean. I’ve got one more for you. When you think about retirement, someone out there says, “Well, at some point, I do want to stop working. I’m going to need my money to start working for me, at that point.” How can they determine if they have actually enough to retire and have the lifestyle that they want?

Sean: So John, this comes back to what we talked about at the very beginning, and you’re right, we’ve talked about a lot of different topics and ultimately, they all flow together, which I think is the importance of understanding financial planning. The very first thing you got to do is have a plan. When you have a plan, you got to set a plan. You got to make yourself, and one thing, John, to add to that plan, you got to have accountability. That’s why I love Creative Planning. We provide that accountability for our clients to sit down, review the plan. We talk about investments in giving yourself growth. We talk about giving you the highest probability of success inside of that versus going after an individual stock. And then all of that is really determined based on, okay, in retirement, how much income do I need to live on?

And then what other income sources could I potentially have when I get to retirement? Social security is one of those things that man, if you’re 25 years old, I wouldn’t plan on having social security. If it’s there, great, it’s gravy. Pensions, companies back 20 years ago, everybody had a pension and now companies don’t offer pensions anymore. So it’s so critically important for anybody right now is to understand your plan, know when you want to retire and how much income you need. That then backs into the budget conversation, John, to say, “Hey, if I truly want to retire at age 60 and I want to create $150,000 of income in retirement, then now I know exactly how much I need to save to get there, giving me the highest probability of success.”

John: Yeah. Hope is definitely not a good investment strategy. You need to have a plan. I would totally agree with that. This has been an enlightening conversation. As always, I enjoy talking with you, Sean, about these things and thank you so much for joining me here on Rethink Your Money.

Sean: John, thank you so much and have a great day.

John: That was Creative Planning Wealth Manager Sean Granere, and if you’d like to speak with a local wealth manager just like Sean and myself, visit creativeplanning.com/radio now to schedule your visit.

Let’s spend some time rethinking our money. A common sentiment is maybe I shouldn’t be buying while the market’s this unstable. So let’s challenge this notion with actual data, not just what we think or how we feel. To back up why this is so wrong. When you examine the historical performance of the S&P 500, let’s just use that as a proxy. 500 largest US stocks, we find something intriguing. If you had a holding period of less than five years and you bought the S&P 500 only when it was within 10% of its record high, so basically, things were pretty calm, you felt pretty good about it, your average return was 5.1% annualized, by the way. So 5% a year. If instead you bought when the S&P 500 was 10% or more below its highs, things are not going well, it’s in some correction, maybe a bear market. Your average annualized return with a holding period of less than five years was 12.9%, according to Bloomberg.

The returns have been over double. If you go over a period of five to 10 years for your holding period, we start seeing things work back to their averages. If you’re within 10% of the record high, 9% a year. If you are 10% or more below the record high, 11%, so pretty close. Once you get out from 10 to 15 years holding periods or 15 to 20 year holding periods or 20 plus year holding periods, both numbers start compressing closer and closer to one another. Here’s the takeaway, in none of the holding periods do you see higher expected returns when the market is closer to its all-time highs than further below. And I think this is intuitive if you understand averages. The market should theoretically have better forward performance when it’s currently far off of its highs.

And so this notion that you’re waiting for someone to shoot flares in the air and that things are all rosy before you’re going to get back in the market and invest, and by the way, I’m seeing it, lot of cash sitting around waiting on the sidelines for things to “get better”. The data doesn’t support that that is a good long-term approach to stock market investing. So the verdict on not buying because the market is unstable, guilty, that is absolutely something you should rethink. Our next money topic is with AI becoming more relevant, I should shift my investments toward more tech, to benefit from what I believe to be the next world altering technology. When it comes to investing, it’s really easy to get caught up in the hype, certainly surrounding AI. We’ve seen this in tech as well. I get it. Some of those companies become the largest in the world and you make big bets on those companies, you make a lot of money.

Let’s look at the other side of the coin. Just step back for a moment and think about why it might not be wise to go all in on tech or even heavily saturated in tech. One of the most fundamental principles of long-term investing is diversification. The power of investing is getting good returns over the longest period of time, not getting the absolute best optimal returns for a short period of time, which is often what happens if you’re investing in this wave. Let’s suppose that you are a typical investor right now. You have some index funds, and if you do, you almost certainly own the S&P 500. Well, that index is already tilted inherently toward a momentum strategy. It’s a cap weighted index. The largest companies in the index, which are often the tech giants, right now, Apple and Microsoft, the two largest represent about 15% of the entire index.

So the largest companies already have significant influence on the overall performance of your account. But here’s the thing, the beauty of diversification is that it allows you to participate in growth of various industries and sectors. Nobel Prize winner, Harry Markowitz has a famous line where he talks about the only free lunch in investing is proper diversification. So it’s crucial to recognize that even if artificial intelligence is in fact set to revolutionize industries, predicting which specific stocks will be the winners, that’s the much bigger challenge you’re confronted with than trying to figure out if AI in fact is going to be impactful. Think about the.com boom in the late ’90s, it was not overly difficult to see that the internet was going to be a thing. It was totally the talk of the town and people were saying, “Are you on email? You don’t have an email yet. You’re crazy. It’s great.” But that’s like how AI is today.

Companies like MySpace, America Online, you’ve got mail. Remember that? Dong, dong… Trying to connect to the internet and then waiting five minutes and getting on. AOL was email, instant messenger, access to the internet. It was the major player in that space at the time. Yahoo was the big search engine. But guess what? You fast-forward a few years and it was a completely different landscape. MySpace had lost its popularity to the rising star of Facebook. America Online lost its dominance, and Yahoo struggled to keep up with search engine giant Google. Imagine if you’d gone all in on MySpace or AOL because you thought the internet was going to be the next big thing. Well, there’s a huge difference between the bleeding edge and the cutting edge.

You would’ve been left scratching your head and wondering where it all went wrong. People have experienced this with crypto. Oh, the blockchain is the thing. It’s the next big thing. But does it mean that specific coin is going to emerge victorious because of this technology? That’s the hard part, and it goes to show that even in these transformative times, it’s really a challenge to pinpoint the winners and also the losers to avoid those.

So if you are someone who’s thinking, because of AI, I’m going to shift more investments toward companies that will benefit from tech. You don’t need to. If you’re broadly diversified in index funds, you will have the exposure that you need to those companies. Because remember, for every Apple, there are 100 palms in blackberries, and that’s why diversification in a broad-based approach that’s aligned with your financial plan and your time horizons and your tax strategies and your estate planning is essential so that you can capture overall growth that meets the needs of your specific objectives and fortunately, will not hinge on you or your advisor or your money manager being right, because this is an unpredictable world and an unpredictable stock market.

And so I feel bad, but the verdict on this one is also, guilty. Trash that one, it’s not something I would recommend. Our final piece of common wisdom to rethink is that ETFs are now the best way to access the stock market. And so picture this, you plan on going to Hawaii, you can probably get there by boat or airplane. One’s going to get you there a lot quicker and a lot more efficiently. And that’s basically the comparison at this point between ETFs and mutual funds. ETFs are the jet. You’re there in five and a half hours. You’ve got a cocktail or a ginger ale while you’re on board, maybe a little snack, some Biscoff cookies. Pretty nice. You watch a couple movies, listen to an audiobook. I know. With seven kids, I’m just dreaming about these flights where there’s no kids on them and I have the chance to do that because our flight is really actually not like that.

It’s not really helping make my point, but our flight’s like screaming kid over here, handing out snacks. Wait, we’re still on the tarmac. We haven’t even left. I’m out of snacks. Oh-oh, their show’s not downloaded. This is a disaster. Yeah, that’s my world, but that doesn’t work for my analogy. So let’s just continue on with this tranquil flight, right? That’s ETFs. And as the famous investor Peter Lynch once said, longtime manager at Fidelity, is to know what you own and know why you own it. Well, with ETFs you have the ability to do just that. ETFs are like a basket of investments similar to a mutual fund, but they trade on an exchange just like individual stocks. This means you can see exactly what’s in your ETF and it’s real-time price just like checking the stock prices on your phone.

Now, mutual funds similarly, are a basket potentially of stocks if it’s a stock mutual fund, but by contrast, they are that boat that you’re taking across the ocean, getting pounded by the waves. It takes you four days to get over there and put on your lay and listened to some ukuleles and that Hawaiian sunset, yeah, it took you a lot longer. It was painful. So most mutual funds are managed by professional fund managers who decide which stocks or bonds to buy and sell within the fund. And all the data, which I’m not going to belabor now, shows that even these professionals are terrible at picking the right stocks and bonds, and so it’s really not that appealing.

Certainly from a performance perspective, but you also don’t know the exact holdings of the mutual fund at any given time and you can only find out the net asset value. You’ll hear that referred to as NAV at the end of the trading day when the mutual fund reprises. Another huge advantage to ETFs are the tax implications. When a mutual fund manager buys or sells securities within that fund, it can trigger capital gains that then get passed onto you as the investor.

I don’t know if anything makes people more confused and certainly frustrated than when they own a mutual fund and the mutual fund is down in value during the year that you’ve owned it, but then you get 10.99 and owe capital gains tax. It’s like, wait a second, I didn’t sell anything. I haven’t made any money in this. Why am I paying taxes on gains? Well, the answer is because there were unrealized gains inside of that mutual fund in those positions that were purchased long before you were ever an investor of the mutual fund. When they sold them, you had to essentially pay your neighbors taxes even though you had no benefit from any of those gains. As you can imagine, that’s really frustrating. Where with ETFs, you have more control over those capital gains allowing you to potentially minimize your tax burden and keep more money in your pocket.

Another important aspect to consider in general when you’re investing are the costs. ETFs are known for low cost. According to recent data, the average expense ratio for an ETF’s less than a half a percent. Mutual funds are right around three quarters of a percent. If they’re active mutual funds, I see them as high as one and a half, 2%, and they’re sometimes loaded, paying commissions, they’re C shares, and frankly with most ETFs, they’re even a lot less than that. One 10th of 1%, two tenths of 1%, so significantly less cost. Now of course, when I talk about mutual funds, I’m not referencing index funds, I’m talking more about active mutual funds. To summarize, when you’re looking at ETFs versus mutual funds, ETFs offer more transparency, control, tax efficiency, cost savings. They really are like that 757 landing smoothly in Maui. But before I finish, I want to give you a bonus option because there’s a third choice that is growing rapidly in popularity.

It’s something that we help clients with here at Creative Planning and for the right person, it’s superior to even ETFs, and that’s called direct indexing. So direct indexing is where you essentially remove the wrapper of the index fund or the ETF and you own all 500 stocks, let’s say within the S&P 500, but you own them individually. So you have an account with 500 individual stocks. Now you might be asking, “Why would I want to do that? I’m going to have a statement 30 pages long when I can just buy one index fund or ETF that owns all 500?” I’m going to give you three primary reasons.

Number one is customization. If you don’t want to own tobacco stocks or companies that make money off pornography, you can extract them. If you’re an executive at a tech company and you want no tech, but you want to own everything else that’s in the S&P 500, you can just extract tech or even the individual stock that’s in that index that maybe you have a bunch of stock options for because you worked there for 25 years, you could pull that stock out of the portfolio individually. So the first thing’s customization.

Second is cost. Even though ETFs are inexpensive, direct indexing is usually even less expensive, and the third may be the most important for a lot of people as to why they direct index, are the tax benefits. At one point recently, the S&P 500 index was up in value by a lot, but far more than half of those stocks inside the index were down in value. Most had lost money, but a few of the giants were doing really well, and it was pulling the entire index up. If you’re direct indexing, it allows you to harvest losses from those 300 to 350 stocks that were down in value. Book those losses, use those to offset capital gains. This is the direction of the industry. We were talking about AI earlier. This is the next big thing in my opinion when it comes to investing.

So back to the conventional wisdom at hand, ETFs are now the best way to access the stock market. Yep, that’s correct, certainly when comparing to mutual funds, but again, I think ETFs are likely to be upstaged for larger investors by direct indexing. If you’d like more customization within your portfolio, that is what we provide here at creative planning. It is one of our pillars. We don’t just stick you into a model portfolio and tell you, “Hey, here’s how we’re going to manage your money.” We tailor every aspect of your investment plan to your unique situation and your unique desires. If you are interested in learning more about how you might benefit from an approach that isn’t one size fits all, contact us now by going to creativeplanning.com/radio to speak with one of our local advisors.

Lauren, one of my producers who is normally behind the scenes. I’ve asked her, I’ve said, “Come on, you’re going to be on the radio show and read these listener questions for us.”

Lauren: Hey John, thanks for having me. It’s nice to join you on this side of the mic, and we got a great set of questions this week. So I will start off with our first one, which is Jeff from Wichita, Kansas. He says, “Hi, John. Talk about the debt ceiling has been all over the news and I’m concerned about what it means for me. Can you explain what the issue is and how I would be impacted by it? Are there potential consequences that could affect me if the ceiling isn’t raised before the deadline?”

John: Let’s just break this down a little bit and start with what is the debt ceiling? Well, it’s the limit on the amount of money the US government can borrow to pay for everything it’s already approved spending on. By the way, only us and Denmark have this legislative limit on our debt. This isn’t common across the board internationally. Its purpose, it was designed as a way of keeping ourselves from being reckless in the future with spending, and it forces us to have conversations about how the government’s going to spend money. Those two intentions are great, but it’s too weak and too strong simultaneously. And what I mean is it’s too weak in the sense that Congress can just vote to lift it. It’s happened 70 times in the last 100 years, so it’s not a hard thing to get around, but it’s too strong in the sense that the negative consequences if we don’t get something figured out, are wildly out of proportion to the behavior that we’re trying to regulate.

It would literally be like one of my seven kids gets out of bed when I’ve said, “Hey, stay in bed.” By the way, that never happens in the Hagensen household. Of course, it happens every single night and they walked across the hallway and I said, ‘You’re grounded for the next three years. You are never going to play with friends ever again because you got out of your bed.” It’d be like, “Wait, what?” My wife would probably be like, “John, a little extreme there. I know they’re not supposed to get out of bed. Little intense.” That’s basically what we are doing here when it comes to the debt ceiling. The real question becomes, what does it mean for you? If we were to default on our debt, what would impact the treasury’s ability to issue more debt and to pay back principle on old debt and pay coupons on bonds?

Now, I want to pause there for a moment and say the likelihood that the government of all the things that they would choose not to pay would be social security or Medicare or interest on their bonds. It would almost be like you lost your job. You’ve got a mortgage, credit cards, a car payment, and whatever other smaller debts you had out there, you would prioritize the ones that you needed to pay first, but also, if they defaulted, there would be an impact on the credit worthiness of the country, which would obviously be not great. This happened to Canada in 1994 and their interest rates skyrocketed and they had an emergency program to reduce spending and raise taxes to get things back under control.

Now, obviously, here in America we are a very different situation, but the likelihood we end up getting to that point’s pretty low because it would have very negative implications on both parties. And let’s face it, the goal of most politicians is to position themselves for endless reelection. But a fantastic question there, Jeff. We have offices in Kansas. In fact, our headquarters is just outside of Kansas City, and if you think it’d be helpful to speak more about your specific situation with an advisor, you can visit creativeplanning.com/radio. All right, Lauren, what’s next?

Lauren: Our next question comes from Sean in San Diego, California. He asks, “I want to move, but my mortgage is at 3%. Would it be crazy with rates over 6% to do this? Should I wait until they come down? Do you think they will ever come down?”

John: I think with rates having risen as fast as they did, this is very common, what Sean is thinking about. So the factors that I would be considering right now, if I had a 3% mortgage, just first and foremost, how badly do I want to move or need to move? If you have an amazing promotion opportunity and it is in a different state and you have to move, then you have to move. But if you have a 3% mortgage right now, I would say, “Is this worth it to me?” I just had a friend who lives actually in San Diego and was down by the beach in a two bedroom, one bath condo, and it was incredible. They lived down there over a decade. They’d walk down to restaurants, they’d jog on the Strandway. It was fantastic. But they recently had their second kid, literally, they don’t have enough space. They needed a yard, but more importantly, they needed a third bedroom.

The baby was waking up their other child when they tried to have them sharing a room. It was just terrible. In that scenario, yes, you’d prefer to keep your 3% mortgage, but it’s time to move. So generally speaking, Sean, and I don’t know the rest of your circumstances, if it’s a big priority and you can afford it and it doesn’t derail your other financial objectives, then I would do it. It’s where you live. Now, your last part of the question on whether I think rates will come down. Yeah, absolutely. Now, when that happens and how dramatically they reduce, nobody knows that. But remember, you’re not married to your mortgage. Mortgages are fantastic because if rates go up or stay the same, you can keep your current mortgage and if they go down, you can refinance. Or at that point you move, and when you obtain the new mortgage, it’s at a lower rate.

So I do wish that I could be a bit more helpful, but man, a house is such a personal choice. If you told me that you have a $5 million portfolio and you make $500,000 a year and you really want to move, and the difference is a $3,000 a month mortgage or a $5,000 a month mortgage, but you really want to move, if it’s a priority, you’d do that. If you told me you couldn’t even fund your 401k up to the match and you’re going to be really house poor because the payment’s going to be so much higher with the higher interest rate and you know don’t really even want to, but you feel like maybe you should because it’s a little bit better situation. No, I wouldn’t do that. All right, Lauren. Next question.

Lauren: Last question is from Beverly in Indianapolis, Indiana. She writes, “My mother is in her 80s and refuses to get a will. She says she does not have enough money to really need one, and that when she dies, the state will deal with it. Can you tell me what will happen and what I can say to her about this?”

John:  Okay. Well, this one’s great because we all can relate to a parent or an in-law. Now mine, of course, no, if you’re listening, this doesn’t apply to you, but that doesn’t really want to listen to our advice. Of course, my suggestion would be to try to encourage her to get at least a basic will, make sure things are titled correctly, put some payable on death or transfer on death parameters on the accounts that you can. What’ll happen is that state law determines the distribution and states all have different laws, and I’m not an expert by any means on Indiana’s probate system, but it’s important that you understand that not all states recognize domestic partners or common law spouses. So if there’s some nuance to her situation, it can be complicated. So that’s the first thing.

The second thing is the probate process will then start and the court will appoint an administrator to oversee distribution. Then the distribution to the heirs will occur, and then there can be disputes and delays. I hope there aren’t in your situation, but if there’s no clear directive from any sort of will, she has no documents. Disputes can arise between family members regarding the distribution of assets. I’ve seen everything. Mom said, I can have the baby grand. You don’t even play the piano. Well, you don’t even have space in your apartment. I’ve got a big house with a front room where it should go. The lighting’s perfect. No, mom told me specifically on her deathbed that I get the baby grand. And so Beverly, if you can convince your mother to do so, we might be able to help you knock out what she needs from an estate planning standpoint to make sure that she is squared away. If you’ve got questions like Jeff, Sean or Beverly, fire those over to radio@creativeplanning.com.

Henry David Thoreau once said, simplify… Simplify. These words hold profound wisdom that resonates, in fact, maybe more so in today’s complex world, and that’s my final tip for you today. The true happiness in your financial life lies not in the pursuit of more, but in deliberately choosing less. And I know, it may seem counterintuitive at first, it’s certainly counter-cultural, but I am convinced that living a happier life is found in embracing simplicity. Look at us as a society, we burden ourselves with the weight of excessive debt, not just individually. Look at our government. Endless consumerism and just that constant poll that we’re all confronted with for more, but living a happier financial life through deliberate simplicity means identifying what truly matters to you. It means understanding your values and your goals and aligning your actions with them. It means finding contentment in the present moment rather than constantly chasing after that next shiny object.

And I’m as guilty of this as anyone, but by intentionally choosing less, you can cultivate a sense of gratitude for what you already have, and you’ll find joy in the simple pleasures that so often go unnoticed. Happiness and financial wellbeing are not measured by the size of your bank account, but much more so by the richness of your experiences and the depth of your relationships. The greatest wealth that you and I can obtain is to live with contentment. And remember, we are the wealthiest society in the history of planet earth. Let’s make our money matter.

Announcer:         Thank you for listening to Rethink Your Money, presented by Creative Planning. To hear past episodes or learn more about the topics and articles discussed on the show, go to creativeplanning.com/radio. And to make sure you never miss an episode, you can subscribe to Rethink Your Money wherever you get your podcast.

Disclaimer:          The proceeding program is furnished by Creative Planning an SEC registered investment advisory firm that manages or advises on a combined $210 billion in assets as of December 31st, 2022. John Hagensen works for Creative Planning and all opinions expressed by John or his guests are solely their own and do not represent the opinion of Creative Planning or this station. This commentary is provided for general information purposes only. Should not be construed as investment, tax or legal advice and does not constitute an attorney-client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained for sources deemed reliable but is not guaranteed. If you would like our help request to speak to an advisor by going to creativeplanning.com. Creative Planning tax and legal are separate entities that must be engaged independently.

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